Sunday, 26 February 2017

Speaking yesterday after releasing
a global-macro
outlook for 2017-18, the Vice President of the Credit Rating Agency Moody’s,
Madhavi Bokil, announced that the Agency expects global activity to maintain
its upward curve. However, there were a number of caveats that were attached to
the announcement and one of them in particular will be the focus of this short
post. Citing the shifts in economic policy emanating from the Trump administration
in the U.S., which it suggests would affect the global economy via shifts in
its views to trade and interest rates, and the risks associated with a
deceleration in China’s economic expansion, Bokil is confident that ‘destabilising
economic and policy dislocations will be minimal’ in the next few years.
However, there is another caveat of Moody’s’ which is of interest when
understood with a recent development within Europe.

Bokil continued by discussing that
the political and fragmentation risks in the E.U. and the European area also pose a
concern for global economic stability, and this is undoubtedly true. Yet, what
this fragmentation-based risk may be is not certain, simply because of the
environment within the E.U. at the moment. Fragmentation may come in the form
of political breakdown, something which has been confirmed by the U.K.’s decision to leave the
E.U., and the increasing rise of populist and nationalistic political
parties on the continent, particularly in France with the Front
National’s Marine Le Pen and in the Netherlands with the Party
for Freedom’s Geert Wilders. However, this social breakdown is being
predicated upon an economic breakdown which is the focus of this piece. Moody’s
suggests that the general sentiment will be a maintenance of the upturn in
global productivity, but what does this actually mean? Whilst productivity
increases, there is also the matter of global debt, and that is increasing to
astonishing levels. Standard & Poor’s, Moody’s great credit rating rival,
announced on Friday that worldwide sovereign debt is set to reach a record
high of $44 trillion, with the U.S. at $2.2 trillion and Japan at $1.8
trillion representing the most indebted countries. Also, the U.K.’s reduction
in credit rating since the decision to leave the E.U. means that now the
percentage of sovereign debt that has a ‘triple-A’ rating is at an all-time
low of 7%, which suggests that there is to be an increase in debt at the same
time as creditworthiness is evaporating. This issue is, arguably, the real
threat facing global safety.

This issue of sovereign debt being a threat to stability is currently plaguing Europe. Speaking over the weekend,
Germany’s deputy finance Minister, Jens Spahn, told reporters that Greece must not
be allowed to be relieved of its debt obligations to creditors, mainly
because of the precedent it would set to other E.U. nations that are teetering
on the edge. Speaking with regards to the International Monetary Fund’s
conclusion that Greece will
need further debt relief, Spahn is mindful of two important aspects:
firstly, other E.U. nations who are facing financial difficulties and who have
adopted sweeping and deep-cutting austerity measures will potentially revolt if
Greece is given relief on its debt whilst they are not; and secondly, he is acutely aware that German citizens, who account
for the highest contribution into the European Stability Mechanism with 27% are, as a majority, against
granting relief to Greece and are actually in favour of Greece leaving the
Eurozone at a ratio of three in every ten German citizens. This situation is
unlikely to be resolved at any point in the near future, which is an issue
because the sentiment is that sovereign debt is continuing to increase regardless
of such volatility in the marketplace.

The overarching issue is one of
irresponsible growth. There are calls to increase spending in the U.S., despite
record levels of debt, which would suggest there may be ‘Government
Shut-Downs’ very soon in the U.S., whilst in Europe the fear that is
gripping the bloc, in terms of doing everything to remain united, is
potentially sowing the seeds of its demise; internal fractions are growing irrepressibly,
which is arguably the main threat to global stability. The era of austerity in
the E.U. is causing fractions that are causing shock-waves across the rest of
the bloc, and how it deals with Greece will
have an effect upon how the bloc develops. Unfortunately, there is no way in
which this ever-increasing pressure will result in anything other than a
massive eruption. The global marketplace, as intimated by Moody’s, is continuing
to grow but that growth is based on a particularly fragile foundation – it is
this arrangement which suggests that the positive outlooks that are coming from
professional onlookers are based on a belief that this pressure will not erupt
but, after the incredible year of 2016, it is potentially the case that an
eruption of this pressure is likely and could result in catastrophe. The fragility of the
E.U., when analysed in comparison to the newly-protectionist mantra of the
United States, is reminiscent of an era that is etched into the human consciousness,
as discussed in a previous
post. It is hoped that this scar is not repeated by the culmination of
these events.

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